Top 10 Dow Dividend Stocks for September

by Jeff Reeves | September 10, 2012 1:29 pm

Top 10 Dow Dividend Stocks for September

As we get rolling into September, the stock market continues to rally — much to the shock and surprise of many who think flat-lining corporate revenues[1] and debt trouble in Europe and Washington (not to mention persistent unemployment trouble) should be holding stocks back.

Will the gains continue through the end of the year? Or will we see the macroeconomic troubles and global uncertainty start to take a toll? It’s anyone’s guess — and clearly “logical” bearish sentiment hasn’t held back the market as the S&P sits on a 14% gain year-to-date in 2012.

Whether you’re looking for a low-risk way to keep buying this rally or whether you’re looking for a safe place to park your cash before the bottom falls out, high-yield dividend stocks are one of your best bets right now. If QE3 comes to pass as many expect, bonds aren’t going to do much in the way of returns — and we all know that CDs and cash can’t keep up with inflation at these tiny returns.

These top 10 Dow dividend stocks are some of the best picks out there right now if you’re looking for investment ideas. There are a host of picks in the Dow with dividends, the vast majority over 2%, but these all yield 3% or better.

#10: Chevron

Chevron (NYSE:CVX[5]) bumps financial stock JPMorgan Chase (NYSE:JPM[6]) off the list from last month[7] and rejoins the Top Dow Dividend stocks list to take the No. 10 spot.

This major oil stock is smaller than Exxon Mobil (NYSE:XOM[8]), but that’s like saying King Kong is smaller than Godzilla. CVX has a market cap of about $225 billion, to make it one of the 10 largest corporations that trade on American stock exchanges. Chevron also generates more than $200 billion a year in revenue, placing it on the top 10 list of U.S.-listed corporations on that front, too.

Oil stocks like Chevron can be cyclical, but to me that makes CVX a good investment now. The recovery hasn’t kicked in, but baseline demand is strong — which means you won’t be faced with much of a downside risk since oil consumption isn’t going to disappear anytime soon. Geopolitical unrest in the Middle East also ensures that crude won’t be dipping significantly in the near term, even if energy needs soften slightly.

So why not collect a hefty dividend of almost 3.2% while you wait for a cyclical recovery to lift Big Oil stocks like Chevron? Seems like a no-brainer for investors looking for a low-risk way to enter the market right now and earn dividends while they wait.

#9: General Electric

Current Dividend Yield: 3.2%Performance So Far in 2012: +20%

General Electric (NYSE:GE[9]) is on par with Chevron (NYSE:CVX[5]) when it comes to market cap and revenue, and has almost the exact same dividend yield. GE also is in the energy biz with its nuclear and wind turbine operations, but General Electric is so much more.

This diversified conglomerate gets almost half of its revenue from overseas, giving it a global flavor without the risk of an emerging-market small-cap. Its medical technology, such as imaging machines, also provides a stable and downturn-resistant revenue stream. On the growth side, GE has seen significant improvement domestically in its financial arm[10] that caused so many headaches (and a much-maligned dividend cut) during the Great Recession. And of course its cyclical operations like infrastructure or aviation allow it to tap into a recovery if and when business spending picks up.

Like Chevron, this is a good company to sit back and wait for growth because of stability and a nice dividend. You still might hold a grudge against GE because of its infamous dividend cut during the financial crisis. But consider that in April 2011, GE paid 14 cents each quarter. By the summer it was paying 15 cents, and by January 2012 it was up to 17 cents a quarter. And earlier this year, regulators signed off on a special dividend from GE Capital[11] along with permission for the group to resume paying regular dividends going forward.

Payouts aren’t back to pre-recession levels, but this progress is significant.

#8: Procter & Gamble

Current Dividend Yield: 3.3%Performance So Far in 2012: +3%

Procter & Gamble (NYSE:PG[12]) is one of the biggest names in dividend investing, so I’m not uncovering some hidden gem here. But it’s worth noting that P&G has long-term potential despite the fact that many investors might think it has fallen out of fashion.

Admittedly, PG stock hasn’t doing much on a share appreciation basis year-to-date — but it is up about 15% since the end of June. Procter & Gamble CEO Bob McDonald[13] has a big long-term plan that involves fighting rising commodity costs and finding growth overseas. It also just posted pretty strong Q4 earnings[14] to send shares up about 15% since the end of June.

You can’t get more bulletproof than brands like Gillette, Pampers and Duracell. These consumer products provide reliable revenue across rough economic times — and thus reliable dividend payments, too.

And longer-term, there’s a chance that Procter & Gamble will benefit very nicely from changing currency exchange rates. A strong dollar and weaker euro have weighed on the earnings of this multinational. But if that dynamic changes, it could boost profits.

#7: DuPont

Current Dividend Yield: 3.4%Performance So Far in 2012: +11%

E.I. du Pont de Nemours & Co. (NYSE:DD[15]), colloquially known just as DuPont, is another stock that plays into the cyclical schtick. It is a chemicals giant with more crazy plastics and coatings than you can shake a synthetic stick at, meaning that DuPont revenue is closely tied to business spending. Products include including Tyvek house wrap, Teflon non-stick coatings and stretchy Lycra synthetic fabrics.

The diversity of these products gives DD both a way to stay stable in tough times and the opportunity to tap into growth when the economy recoveries. Obviously, these items aren’t as sexy as a slick smartphone or a luxury automobile. But DD has a broad reach, so it doesn’t really have to worry about one sector or one set of economic data points. This makes it a great long-term investment.

DD stock admittedly lagged the market in 2011 with an 8% decline but has topped the Dow slightly this year. It has refocused its strategy, including a pending sale of its auto paints business[16] to the Carlyle Group (NASDAQ:CG[17]) for about $5 billion.

And as InvestorPlace’s Dan Burrows pointed out[18] in August, “The stock is trading 17% below its own five-year average on a forward earnings basis, while ROE is a very shareholder-friendly 30%.”

The icing on the cake is the 3.4% yield after DuPont added another 2 cents to its quarterly payday[19], proving this industrial company is not just preserving dividends — but improving them.

#6: Johnson & Johnson

Current Dividend Yield: 3.6%Performance So Far in 2012: +4%

Johnson & Johnson (NYSE:JNJ[20]) has raised distributions for 50 years in a row and has a 10-year dividend growth rate of 12.4% per year — making it one of the most reliable payers on Wall Street and one of InvestorPlace‘s Dependable Dividend Stocks[21].

Of course, J&J stock hasn’t been a hit lately. Since the recession, the company has hit some headwinds thanks to quality control issues, product recalls and questions about management. But a new Johnson & Johnson CEO at the helm[22] is changing things and hoping to change all that in the months ahead.

A plus while you wait is the nice 3.6% dividend yield. And unlike some Big Pharma stocks that pay nice yields but might be gutted by patent expirations, JNJ consumer health offerings like Band-Aid and Tylenol provide its steadiest revenue stream beyond vaccines and prescription medical products.

Revenue admittedly has been a bit stagnant at J&J during the past few years; hence, the stock has seen some underperformance. But even on reduced projections, Johnson & Johnson could see a stunning 45% jump in earnings per share for fiscal 2012 compared with fiscal 2011. Time will tell if management can hit those targets, but in the meantime the dividend is a pretty nice hedge — even if the stock moves sideways.

#5: Pfizer

Current Dividend Yield: 3.6%Performance So Far in 2012: +11%

Pharma stocks are always mainstays for dividend investors, and Pfizer (NYSE:PFE[23]) is one of the favorites. For instance, amid the quest for yield last year, the stock outperformed the market nicely in 2011 with one of the best returns in the entire Dow Jones[24] in 2011 — 23% in gains, to be precise.

However, there have been some setbacks of late. In August, J&J and Pfizer abandoned their Alzheimer’s drug studies as poor results hit home[25]. And of course, patent expirations hurt — most notably the recent departure of blockbuster Lipitor into the realm of generic competition.

Still, thanks in part to good numbers lately, PFE is now outperforming the broader Dow Jones Industrial Average so far in 2012. Shares have leaped almost 10% since mid-July alone.

Looking forward, the company has a decent research pipeline with some up-and-coming drugs that could rotate in to prop up revenues. There’s also some restructuring going on, including an IPO for its animal health business[26]. Also, the company has $29 billion in cash[27] on the books — so even even if revenue hits a hiccup or some of the moves now don’t immediately pay off, the cash is there to preserve this juicy dividend.

Big picture, you can’t get more low-risk than health care. People buy drugs no matter what the economy is like. Also, it’s hard to argue with the growth potential looming in a huge demographic shift provided by aging baby boomers[28]. Thus, Pfizer remains a great long-term dividend play despite some challenges.

#4: Intel

Current Dividend Yield: 3.8%Performance So Far in 2012: -3%

You might be surprised to see a tech stock like Intel (NASDAQ:INTC[29]) on this list — and even more shocked to see the big headline yield! But tech stocks are increasingly paying dividends[30] (I’m looking at you, Apple (NASDAQ:AAPL[3]), and Dow components are no exception. In fact, in addition to Intel, Dow component Cisco (NASDAQ:CSCO[31]) almost made this list with a 2.9% yield that barely missed the cut.

But back to Intel: The dividend yield is a product both of increasing distributions — its recent bump from 21 cents to 23 cents a quarter boosted the yield — and unfortunate share price declines. The company recently was bumped from Warren Buffett’s holdings[32] in Berkshire Hathaway (NYSE:BRK.B[33], BRK.A[34]), and talk of delays over the Windows phone means Intel remains very much behind the curve on mobile chip sales.

However, it’s hard to bet against INTC in the long term. A 3.8% yield makes this Dow component and top dividend payer attractive, but it’s also very much at the heart of the information age. Yes, Intel is suffering as PC sales dwindle[35] — but as the world’s largest semiconductor manufacturer, it’s foolish to think that because laptops are becoming obsolete, this company is too. INTC has its fingers in many electronic pies, and is making a big push into mobile that certainly will pay off later. Intel is focusing on mobile semiconductors and Ultrabook sales[36] to fill in any lost ground.

It’s also worth noting that INTC, like others on this list, is a cyclical stock — without consumer demand for electronics or businesses buying new hardware, INTC is going to see headwinds. That means you might want to get in now and enjoy the nice dividend in anticipation of a longer-term recovery and mobile revenue stream.

#3: Merck

Current Dividend Yield: 3.8%Performance So Far in 2012: +17%

Merck (NYSE:MRK[37]) is similar to Pfizer (NYSE:PFE[23]) in many ways — namely that it faces patent expirations, it hopes its pipeline can step up to fill the void, and it pays a huge dividend.

Except Merck has soared in 2012 because, unlike Pfizer, it hasn’t taken as hard a hit on its pipeline and has seen big successes in up-and-coming treatments to replace the ones it will lose to generic competition. A new osteoporosis drug looks very promising for the drugmaker[38], and investors have piled in since July, driving up shares about 14% in just a month’s time and up 40% in the last calendar year!

Plus, the continued roll-in of the $41 billion Schering-Plough buyout from a few years ago will provide new opportunities for Merck, or at least ensure the company won’t fade away.

Like cohort Pfizer, MRK is sitting on a huge war chest. Some $13.5 billion in cash and $1.4 billion in short-term investments keeps this pick pretty safe when it comes to writing the checks.

#2: Verizon

Current Dividend Yield: 4.7%Performance So Far in 2012: +17%

Verizon (NYSE:VZ[39]) has been labeled a sleepy telecom stock. Except that since this spring, VZ shares popped significantly thanks to decent earnings numbers as well as a massive demand for yield on Wall Street.

Big-picture, Verizon is one of the most secure plays out there. It remains the leading wireless telecom provider in the U.S. by subscriptions and gets 50% of its revenue from wireless subscribers. The company also is one of the top high-speed Internet providers in America via its FiOS fiber optic network. As the world becomes increasingly wired, it’s more important than ever for companies like Verizon to be involved with the operations of businesses and the lives of regular Americans.

This provides a very stable revenue stream that accounts for huge dividends. Like many low-risk dividend stocks, this is a double-edged sword because there might not be any huge growth opportunities for the entrenched telecom. But strong cash flow generation and the lack of any real competition from anyone other than AT&T (NYSE:T[40]) means this telecom stock is a stalwart that’s here to stay.

There is a catch: As InvestorPlace Assistant editor Marc Bastow said in a recent VZ writeup that was bullish on the stock[41], Verizon currently pays out more in dividends than it makes in net income — and it just raised its dividend further[42]! But predictions of solid if not enormous future growth should mean those dividends keep flowing nicely.

#1: AT&T

Current Dividend Yield: 4.7%Performance So Far in 2012: +24%

One of the biggest stories in 2011, in case you were living under a rock, was that AT&T (NYSE:T[40]) tried to leapfrog rival Verizon (NYSE:VZ[39]) in the wireless market via a buyout of T-Mobile. But regulators ran interference, and AT&T abandoned its bid[43].

Don’t think that means the biggest dividend payer in the Dow Jones Industrial Average should be cut loose from your portfolio, though. With a dividend yield of about 5%, this Dependable Dividend Stock[44] is a heck of an income play. And with a 22% surge in 2012, it’s showing perhaps one of the best investments in 2012 on capital-gains basis alone.

The story is the same for AT&T as Verizon, where a strong balance sheet and its entrenched status are offset by the lack of growth and the highly regulated nature of the telecom sector (case in point: the squashed T-Mobile bid). AT&T admittedly fell short on the top line in its most recent report[45], so there is indeed risk. But it’s not like this company is in any danger of losing its dominance anytime soon.

Admittedly, these U.S. telecoms aren’t “growthy” and won’t deliver massive share appreciation. But if you’re looking for a big dividend payer that will keep throwing off cash for decades, AT&T might be your best bet in the whole Dow Jones Industrial Average.

Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.”[46] Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, Jeff Reeves did not own a position in any of the aforementioned securities.